As rates of inflation continue to rise, the Federal Reserve decided to make a bold move Wednesday and increase the federal interest rate by 0.75% points, which is the largest increase in 28 years.
At the press conference announcing the rate hike, Fed chairman Jerome Powell, explained, “We at the Fed understand the hardship that high inflation is causing.” He added, “We’re strongly committed to bringing inflation back down and we’re moving expeditiously to do so,” reports CNBC.
Of course, all students know that in April, President Joe Biden officially extended the student loan payment moratorium until August 31, 2022, and, in response to the COVID-19 pandemic, most federal student loans and their interest rates have been paused since March 2020.
Just as inflation significantly impacts the economy, so do federal fund rate increases. But to what degree do Fed hikes affect those currently holding federal student loans?
The short answer is not much. The Fed rate increase will only influence the interest rates on outstanding loans for a relatively small number of students.
As Forbes reports, since July 1, 2006, federal student loans have been bound by fixed rates, so existing loans won’t be affected. The only exception to the above would be if you received a variable-interest student loan before July 1, 2006. If that is the case, the interest rate on a still-outstanding loan from that time would increase.
However, students and families who have taken out private loans for education may see an increase in their interest rates depending on the terms and conditions in their student loan agreements. Private student loans come in all sorts of fixed and variable terms, depending on the lender.
According to Forbes, private loans represent about 8% of the student loan market with an estimated $131 billion in private total student loans outstanding, per MeasureOne’s semi-annual Private Student Loan Report.